Question

The average tax rate is:

O equal to the marginal tax rate if the tax is progressive.
O the tax rate that applies to incremental dollars of income.
O the ratio of total taxes paid to total taxable income.
O the total tax rate minus the marginal tax rate

Answer 1

The average tax rate is the ratio of total taxes paid to total taxable income, which differs from the marginal tax rate that applies to incremental income.

Step-by-step explanation:

The question focuses on understanding two key taxation concepts: average tax rate and marginal tax rate. The average tax rate is the ratio of total taxes paid to total taxable income. This can be represented as taxes paid divided by income. For example, with an income of $20,000 and taxes of $2,581.25, the average tax rate is 2,581.25 ÷ 20,000 = 0.129, or 12.9%. On the other hand, the marginal tax rate is the tax rate that is applied to the incremental or additional dollars of income. In a progressive tax system, which increases the tax rates with higher income, the marginal tax rate is higher than the average tax rate since higher income brackets are taxed at higher rates.

In the context of a progressive tax system, the marginal tax rate is not equal to the average tax rate, and it certainly is not the total tax rate minus the marginal tax rate. Hence, the correct option is that the average tax rate is the ratio of total taxes paid to total taxable income.